Aquestive(AQST) - 2021 Q4 - Annual Report

Part I Business Aquestive Therapeutics is a pharmaceutical company specializing in orally administered medicines using its proprietary PharmFilm® technology, focusing on CNS disorders and severe allergic reactions with five commercialized products and a late-stage pipeline Overview Aquestive Therapeutics develops orally administered products using PharmFilm® technology for CNS diseases and severe allergic reactions, with five commercialized products manufactured in Indiana - Aquestive Therapeutics is a pharmaceutical company focused on developing orally administered products as alternatives to invasive therapies, utilizing its proprietary PharmFilm® technology[12] - The company has five commercialized products in the U.S. market: four licensed products and one proprietary product, Sympazan® (clobazam) oral film, for treating seizures associated with Lennox-Gastaut Syndrome[12] - Aquestive's development pipeline is concentrated on Central Nervous System (CNS) diseases and severe allergic reactions, including anaphylaxis[12] - All proprietary and licensed products are manufactured at the company's FDA and DEA inspected facilities in Portage, Indiana, with corporate headquarters in Warren, New Jersey[12][13] PharmFilm – Our Oral Film Technology Aquestive is a global leader in oral film drug delivery, producing over one billion doses annually with its patented PharmFilm® technology, offering non-invasive, rapid, and convenient drug administration - Aquestive is a global leader in oral film drug delivery, with the capacity to produce over one billion commercial doses annually[14] - The PharmFilm® technology is protected by a robust patent portfolio, including at least 260 issued patents worldwide (55 in the U.S.) and over 100 pending applications[14] - PharmFilm offers several advantages over traditional drug administration methods, including being a non-invasive alternative to injections, faster onset of action, ease of administration without water, and direct absorption into the bloodstream, which can reduce liver 'first pass' effects[16] Our Product Portfolio and Pipeline The company's portfolio includes proprietary CNS products like Sympazan® and Libervant™, complex molecule AQST-109, and licensed products such as Suboxone®, generating significant revenue Licensed Product Portfolio Revenue | Year | Revenue (in millions) | | :--- | :--- | | 2021 | $42.3 | | 2020 | $40.2 | Market Overview The U.S. epilepsy market, with 3.4 million people and billions in sales, presents an unmet need for rescue therapies, which Libervant aims to address, while the anaphylaxis market seeks non-injectable solutions like AQST-109 - The U.S. epilepsy market includes 3.4 million people, with antiepileptic medications generating billions in sales in 2021 Approximately 1.1 million patients suffer from breakthrough seizures and may require rescue therapy[34][35] - Current rescue therapies for epilepsy, like rectal diazepam gel, are challenging to administer, leading to only about 100,000 of 1.1 million potential patients using them Aquestive's Libervant aims to address this unmet need[36] - Anaphylaxis has an estimated incidence of 50 to 112 episodes per 100,000 people per year The market has a significant opportunity for a non-injectable, easier-to-administer product like AQST-109, as current auto-injectors can be inconvenient and disliked by patients[37][39] Manufacturing and Product Supply The company operates two FDA/DEA-registered manufacturing facilities in Portage, Indiana, adhering to cGMP, and utilizes third-party CROs for clinical trials and external logistics for proprietary products - The company operates two manufacturing facilities in Portage, Indiana, with a combined capacity to produce proprietary and licensed products like Suboxone and Exservan These facilities are registered with the DEA for Schedule II-V drugs[40] - Facilities are subject to FDA, DEA, and other health authority regulations, adhering to current Good Manufacturing Practices (cGMP) They have passed inspections from the FDA, DEA, and TGA[41] - Aquestive uses third-party contract research organizations (CROs) for clinical trials and outsources secondary packaging and logistics for its proprietary products[43] Competition Aquestive faces intense competition from pharmaceutical companies, with Libervant facing a major hurdle due to a competitor's orphan drug exclusivity requiring demonstration of clinical superiority - Aquestive faces intense competition from multinational pharmaceutical companies, specialty pharma, and generic drug companies in a rapidly evolving industry[44][45] - A major competitive hurdle for Libervant is the orphan drug exclusivity granted to a competitor for its diazepam nasal spray on January 10, 2020 This exclusivity lasts for seven years[46] - To gain market access for Libervant, Aquestive must demonstrate to the FDA that its product is "clinically superior" or provides a "major contribution to patient care" compared to the approved orphan drug This is a difficult standard to meet with limited precedent[46] Intellectual Property The company's robust patent portfolio includes over 260 issued patents worldwide and 100 pending applications, protecting its PharmFilm® technology and product formulations, with expirations ranging from 2022 to 2042 - The company's patent portfolio includes at least 260 issued patents worldwide, with at least 55 in the U.S., and over 100 pending applications These patents protect the PharmFilm® technology and specific product formulations[49] - Patents and pending applications for PharmFilm® technology and products like diazepam, epinephrine, and octreotide formulations are expected to expire between 2022 and 2042[49][50] - Aquestive also relies on trade secrets and confidentiality agreements to protect proprietary information not covered by patents[55] Regulatory The company is subject to extensive FDA regulation, involving preclinical testing, IND applications, multi-phase clinical trials, and NDA submissions, often utilizing the 505(b)(2) pathway, while adhering to post-approval manufacturing and marketing requirements - The FDA approval process for a new drug is extensive, involving preclinical studies, an IND application, and three phases of human clinical trials to establish safety and efficacy before an NDA can be submitted[58][60][62] - Aquestive often uses the 505(b)(2) NDA pathway, which allows an applicant to rely on FDA's previous findings of safety and effectiveness for a previously approved drug, potentially reducing the need for extensive new preclinical or clinical studies[77] - The Orphan Drug Act provides incentives, including seven years of market exclusivity, for drugs treating rare diseases (affecting fewer than 200,000 people in the U.S.) This exclusivity can block competitors with the same active ingredient for the same indication[83][84] - The company is subject to numerous healthcare laws, including the Federal Anti-Kickback Statute, the Federal False Claims Act, and the Physician Payments Sunshine Act, which regulate interactions with healthcare providers and payors[85][86][89] Human Capital As of December 31, 2021, Aquestive employed approximately 157 colleagues across manufacturing, R&D, and commercial roles, implementing COVID-19 safety measures that ensured uninterrupted production and high employee vaccination rates - As of December 31, 2021, Aquestive employed approximately 157 colleagues in the U.S., with 81 in manufacturing, 16 in R&D, and 60 in commercial, sales, and G&A roles[109] - In response to the COVID-19 pandemic, the company implemented safety measures such as isolating its R&D lab, segregating its manufacturing site for essential workers, and providing testing, which allowed for uninterrupted production of critical products[113] - By 2021, the company achieved a voluntary employee vaccination status of approximately 90%, including 100% of its customer-facing and field sales personnel[113] Risk Factors The company faces significant risks including a history of operating losses, uncertainty about future profitability, critical need for regulatory approval for Libervant, and the challenge of overcoming competitor orphan drug exclusivity, requiring substantial additional funding - The company has a history of significant operating losses and may never achieve or sustain profitability[117][119] - A primary risk is the delay or failure to obtain U.S. market access for the drug candidate Libervant™, particularly due to a competitor's existing orphan drug exclusivity[117][150] - Aquestive will need to raise substantial additional funds, and failure to do so could force a delay or cessation of operations[117][127] - The business is dependent on third-party contract research organizations (CROs) for clinical trials, and any failure on their part could delay or terminate product development[117][204] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[339] Properties Aquestive Therapeutics leases all its primary facilities, including production and R&D sites in Portage, Indiana, and its corporate headquarters and main laboratory in Warren, New Jersey - The company leases an 8,400-square-foot production facility (Melton) in Portage, Indiana, with the lease expiring in March 2023[339] - An additional 73,000-square-foot facility (Ameriplex) in Portage, Indiana, is leased for packaging and R&D operations, with the current term extending through September 2022[339] - The corporate headquarters and main laboratory in Warren, New Jersey, consist of 23,589 square feet under a lease extending to August 2023[340] Legal Proceedings The company is involved in multiple legal proceedings, including patent infringement litigation against generic drug makers for Suboxone®, antitrust litigation, and a federal securities class action lawsuit - This section refers to Note 20 of the Financial Statements for details on legal proceedings[341] Mine Safety Disclosures This item is not applicable to the company - Not applicable[343] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Aquestive's common stock trades on NASDAQ under "AQST" since July 2018, with approximately 120 record holders as of March 2022, and the company does not anticipate paying cash dividends - The company's common stock began trading on the NASDAQ Global Select Market on July 24, 2018, under the symbol "AQST"[345] - The company has never declared or paid cash dividends and does not expect to in the foreseeable future, retaining earnings for business development[347] [Reserved]](index=73&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, total revenues increased 11% to $50.8 million, driven by higher manufacture and supply revenue and proprietary product sales, but the net loss widened to $70.5 million due to a debt extinguishment loss and increased non-cash interest expense Results of Operations For 2021, total revenues increased 11% to $50.8 million, primarily from manufacture and supply and proprietary sales, offset by decreased license and royalty revenue, leading to a wider net loss of $70.5 million due to one-time expenses Revenues Comparison (2021 vs. 2020) | Revenue Category | 2021 ($ in thousands) | 2020 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Manufacture and supply | 35,312 | 24,881 | 10,431 | 42% | | License and royalty | 5,380 | 14,055 | (8,675) | (62%) | | Co-development and research | 1,635 | 1,264 | 371 | 29% | | Proprietary product sales, net | 8,505 | 5,649 | 2,856 | 51% | | Total Revenues | 50,832 | 45,849 | 4,983 | 11% | Expenses Comparison (2021 vs. 2020) | Expense Category | 2021 ($ in thousands) | 2020 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Manufacture and supply | 14,989 | 12,964 | 2,025 | 16% | | Research and development | 17,047 | 19,886 | (2,839) | (14%) | | Selling, general and administrative | 53,475 | 55,892 | (2,417) | (4%) | | Interest expense | 10,049 | 11,064 | (1,015) | (9%) | | Interest expense related to sale of future revenue | 12,412 | 1,958 | 10,454 | 534% | | Loss on extinguishment of debt | 13,822 | — | 13,822 | 100% | Liquidity and Capital Resources As of December 31, 2021, Aquestive had $28.0 million in cash, supported by its ATM equity facility which generated $29.8 million in net proceeds in 2021, and believes current resources will fund operations for the next 12 months - The company held $28.0 million in cash and cash equivalents as of December 31, 2021[385] - In 2021, the company sold 6,550,486 shares through its ATM facility, generating net proceeds of approximately $29.8 million Approximately $37.4 million remained available under the facility at year-end[390] Cash Flow Summary (2021 vs. 2020) | Cash Flow Activity | 2021 ($ in thousands) | 2020 ($ in thousands) | | :--- | :--- | :--- | | Net cash used for operating activities | (32,979) | (45,459) | | Net cash used for investing activities | (913) | (517) | | Net cash provided by financing activities | 30,109 | 28,457 | | Net (decrease) increase in cash | (3,783) | (17,519) | - The company has the option to access an additional $30.0 million of its 12.5% Senior Secured Notes, contingent upon FDA approval of Libervant[388] Quantitative and Qualitative Disclosures about Market Risk This item is not applicable as the company qualifies as a smaller reporting company - Item 7A is not applicable to us as a smaller reporting company and has been omitted[414] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for 2021 and 2020, along with accompanying notes and the independent auditor's report Note 5. Revenues and Trade Receivables, Net Indivior Inc. was a major customer, representing approximately 73% of total revenue in 2021, while in 2020, Indivior and Sunovion collectively accounted for 83% of total revenue - For the year ended December 31, 2021, Indivior Inc. was a major customer, representing approximately 73% of total revenue[514] - For the year ended December 31, 2020, two customers, Indivior and Sunovion, exceeded the 10% revenue threshold, representing 57% and 26% of total revenue, respectively[515] Note 6. Material Agreements The company has a Commercial Exploitation Agreement with Indivior for Suboxone® manufacturing and supply, a supplemental agreement for patent enforcement payments, and monetized KYNMOBI® royalty rights for up to $125.0 million - The company has a Commercial Exploitation Agreement with Indivior to exclusively manufacture and supply Suboxone®, with pricing subject to volume thresholds and rebates[516][518] - A 2017 Supplemental Agreement with Indivior entitled Aquestive to payments up to a cap of $75.0 million related to patent enforcement actions Payments were suspended in February 2019 pending litigation outcomes, with up to $34.25 million potentially remaining[520] - The company sold its royalty and milestone rights for Sunovion's KYNMOBI® to an affiliate of Marathon Asset Management in November 2020 for up to $125.0 million, of which $50.0 million had been received as of year-end 2021[527] Note 12. 12.5% Senior Secured Notes and Loans Payable As of December 31, 2021, the company had $51.5 million in 12.5% Senior Secured Notes due 2025, with the first amortization payment extended to March 2023, resulting in a $13.8 million loss on debt extinguishment - As of December 31, 2021, the company had $51.5 million aggregate principal amount of 12.5% Senior Secured Notes due 2025 outstanding[543] - In October 2021, the company executed the Fourth Supplemental Indenture, which extended the first amortization payment date to March 30, 2023 This resulted in a one-time loss on extinguishment of debt of $13.8 million[550] - The company has an option to access an additional $30.0 million of 12.5% Notes, contingent upon FDA approval of Libervant for U.S. market access[546] Note 20. Contingencies The company is involved in patent infringement lawsuits against generic Suboxone® manufacturers, an antitrust lawsuit by multiple states, and a federal securities class action lawsuit regarding Libervant's FDA approval - The company is a plaintiff, alongside Indivior, in patent infringement lawsuits against Dr. Reddy's, Teva, and Alvogen concerning generic versions of Suboxone®[589][590][591] - Aquestive is a defendant in a lawsuit brought by 41 states and the District of Columbia alleging federal and state antitrust violations related to the launch of Suboxone® Sublingual Film[595][596] - A federal securities class action lawsuit was filed against the company in March 2021, alleging violations related to public statements made regarding the FDA approval of Libervant[603] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[415] Controls and Procedures As of December 31, 2021, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes identified - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[417] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[419] - As an "emerging growth company," the annual report does not include an attestation report from the registered public accounting firm on internal controls[420] Other Information The company reports no other information for this item - None[421] Part III Directors, Executive Officers, and Corporate Governance The information required for this item, concerning the company's directors, executive officers, and corporate governance practices, is incorporated by reference from the company's definitive Proxy Statement to be filed with the SEC Executive Compensation The information required for this item, detailing the compensation of the company's executives, is incorporated by reference from the company's definitive Proxy Statement to be filed with the SEC Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item, regarding security ownership by major shareholders and management, is incorporated by reference from the company's definitive Proxy Statement to be filed with the SEC Certain Relationships and Related Party Transactions and Director Independence The information required for this item, concerning related party transactions and director independence, is incorporated by reference from the company's definitive Proxy Statement to be filed with the SEC Principal Accountant Fees and Services The information required for this item, detailing the fees paid to and services provided by the principal accountant, is incorporated by reference from the company's definitive Proxy Statement to be filed with the SEC Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, which are included under Item 8, and notes that all financial statement schedules have been omitted as they are not applicable It also provides an index of all exhibits filed as part of the Form 10-K, such as corporate governance documents, material contracts, and certifications